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Imagine that a multibillion-dollar hedge fund is accused of fraud and pays a huge fine to settle with the Securities and Exchange Commission while its famous founder personally ponies up millions more to move past the scandal.
No, this is not SAC Capital Advisors, the $14 billion hedge fund that may face civil charges over an alleged insider-trading scheme.
It was Israel “Izzy” Englander’s Millennium Management, whose $180 million settlement on fraud charges related to market timing shook the hedge-fund industry in 2005.
Today, Millennium has more money under management than ever — $17 billion — and boasts an annualized return of 14.45 percent and a reputation for having the toughest compliance in the industry.
The charges against Millennium weren’t as serious as the insider-trading allegations that have dogged SAC and founder Steve Cohen for years. But Millennium’s case shows that civil charges aren’t an automatic death sentence either as investors weigh SAC’s future.
SAC received a Wells Notice on Nov. 20, warning that it may face charges in a case that led to the arrest of a former portfolio manager. The SEC and federal prosecutors have accused Mathew Martoma, who worked for SAC’s CR Intrinsic until 2010, of insider trading. He has denied wrongdoing.
SAC has reached out to investors to allay fears about the firm’s fate.
Cohen, one of the industry’s best-known managers, has said he acted “appropriately” and is cooperating with the investigation.
“The survival of the firm is dependent in part on whether the individual or persons who are running the business are subject to an action that would preclude those persons from staying involved in the business,” said hedge-fund attorney Ron Geffner.
That’s where Englander lucked out. Market timing of mutual-fund shares is not illegal, but the SEC said Millennium used an “elaborate fraud” to carry it out.
Englander, whom the SEC said had detailed knowledge of the scheme, personally paid $30 million to settle the charges. He was not allowed to work for a registered investment company for three years, although that didn’t stop him from running Millennium.
Like Millennium, SAC faces compliance challenges in that it employs multiple teams that operate independently but report to the head of the firm. Failure to supervise was an issue for Millennium, as it could be for SAC with regulators looking at the firm’s liability as a “control person.”
Unlike Englander, however, Cohen draws on the trading ideas of his managers for his own portfolio.
As part of the consent decree with the SEC, Millennium was forced to boost its compliance. Among other moves, Englander hired a former SEC general counsel, Simon Lorne, as his vice chairman and boasts a legal and compliance staff of 40.
“They got religion,” said an investor who recently left SAC to invest in Millennium.
When it moved into new offices on Manhattan’s Fifth Avenue, Englander installed mezuzahs in each doorway, to bless and protect the firm.